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Wednesday, April 29, 2009

Me and the Moody Economist Guy: It's On!

This morning I was listening to a chief financial economist with Moody Capital predict that GDP will grow starting in the second quarter of this year and from there on out. He also mentioned that unemployment rates would start to turn around.

It piqued my interest because I am predicting further doom and gloom in the economy. It's not that I am necessary a fan of personal angst and joblessness. I wouldn't prefer it. But on the other hand I believe in personal responsibility and consequences. Since America voted for Obama and so many seem to revere him in a really disgusting sort of way, I see it as fair that we suffer because of it. It's justice. You can't vote for a leftist guy like this with literally no serious executive experience. Others have decided that community organizing, teaching a law course once a semester, sitting as a relatively non-accomplished Illinois state senator, and writing books about yourself has prepared him for the presidency. Despite this he sure comes across as self-assured. Anyway, America is getting what we deserve.

I'll go on record again about the following predictions of how the economy will look on Dec. 31, 2010:1. Unemployment will reach 10% to 12%2. Interest rates will reach between 8% to 10%3. Inflation rates will be between 5% and 7%

I am very confident about the unemployment prediction, pretty confident about interest rates and I could see a case for inflation rates not going that high. But at the end of the day, you can't borrow, literally, trillions of dollars and not see interest rates go up eventually. China will emerge as the biggest borrower and as their economy recovers, they will be an attractive place to invest. The competition for their limited investment money will ultimately require the U.S. Treasury to raise interest rates to make purchasing them, to finance our debt, more attractive. China is pursuing sound economic growth policies. I think as industries continue to consolidate and this horrendous monetary policy and all the money that's been printed will work its way through it can't help but reduce competition overall and allow retailers, who are barely surviving right now, to raise prices. In conjunction with the "just print money" policy this is why inflation will increase. I realize this doesn't look like it will happen given that there is deflation and some serious people such as G. Mankiw are actually arguing for negative fed rates.

Overall, as I listen to policy makers, people in the beltway, and other economists, I see a massive disconnect from reality. I've never seen it this bad. And it might be that it has been it's just that I didn't have enough work and life experience to realize it. The economists rely on data, run their models, and seem to think it's fairly straight forward if you just pay attention to things like the makeup of durable goods or inventory holdings or consumer confidence measures, etc.

The fundamental problem is that they don't seem to understand psychology and what makes investors invest. They also don't seem to understand the notion of rational expectations and they don't seem to respect the forward looking nature of investors. I don't see how an investor could make serious 1, 3, and 5 year business cases given the herky jerky nature of the Obama administration. Is he going to nationalize banks? What is national healthcare going to do? What are my energy costs going to be as American makes an "investment" in green technology given that the investment cost of this is going to be, has to be, funded by taxes on current energy? What about unionization in industries where it's not clearly needed? What about veiled references to protectionism? Are we for free trade or aren't we?